Is NetScout Systems, Inc.'s (NASDAQ:NTCT) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at NetScout Systems' (NASDAQ:NTCT) recent performance, when its stock has declined 5.9% over the past week. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on NetScout Systems' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for NetScout Systems

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for NetScout Systems is:

0.8% = US$15m ÷ US$2.0b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.01 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of NetScout Systems' Earnings Growth And 0.8% ROE

It is hard to argue that NetScout Systems' ROE is much good in and of itself. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Thus, the low net income growth of 2.2% seen by NetScout Systems over the past five years could probably be the result of it having a lower ROE.

We then compared NetScout Systems' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 2.8% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is NTCT fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is NetScout Systems Making Efficient Use Of Its Profits?

Summary

On the whole, we feel that the performance shown by NetScout Systems can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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